What is fair market value for Canadian cultural property valuation by the CCPERB?

August 01, 2010 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, What's New from the Charities Directorate of CRA, Canadian Charity Law, Avoiding 'Charity' Scams

Too many people think that fair market value is the “highest price” you can get for something.  In fact that is not correct and the “highest price” is not fair market value - it is the “highest price”.  Here is some interesting discussion from the Canadian Cultural Property Export Review Board on what is FMV that may be helpful to charities in general when they are thinking about fair market value.

“ANNEX I: Definition of Fair Market Value (FMV)
Review Board determinations of fair market value are made for the purposes of subparagraph 39(1)(a)(i.1) or paragraph 110(1)(b.1) of the Income Tax Act, which establishes the additional tax benefits for which donors or vendors of certified cultural property are eligible. When making determinations of fair market value of cultural property for income tax purposes, the Canadian Cultural Property Export Review Board relies on the definition of “fair market value” that is endorsed by the Canada Revenue Agency, as follows:

The highest price, expressed in terms of money, that a property would bring, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.

The above definition stems from the decision of Cattanach, J. in Henderson v. Minister of National Revenue, 1973 Carswell Nat 189, [1973] C.T.C. 636, 73 D.T.C. 5471), as follows:

The statute does not define the expression “fair market value”, but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. These definitions are equally applicable to “fair market value” and “market value” and it is doubtful if the word “fair” adds anything to the words “market value” [Emphasis added].

The factors that are implicit in the definition of fair market value are:

1.Highest price means the highest price that is consistently achieved.
2.The transaction occurs in the market where such properties are most commonly and consistently sold to the public.
3.The public is the customary purchaser or ultimate consumer.
4.An ultimate consumer is a person, institution or corporation who does not hold the item for subsequent resale.
5.The appropriate or relevant market for a determination of fair market value is the most active market for the particular asset and is determined by the frequency and aggregate number of sales.
6.The buyer and seller are typically motivated, where neither is under compulsion to buy or sell.
7.Each party is knowledgeable, informed of all of the relevant facts and acting in their own best interests.
8.An unrestricted and open market is one that is available to the public.
9.The property has been exposed to an unrestricted and open market for an adequate amount of time.
10.The transaction is not influenced by time restrictions that would have a significant effect on the price; for example, fair market value cannot be determined by a forced sale.
11.Payment is made in terms of Canadian dollars. To convert currency to Canadian dollars, appraisers should consult the rates published by the Bank of Canada, and take the higher of the noon and closing nominal rates. This information is available at http://www.bankofcanada.ca/en/rates/exchange.html.
Highest Price
Certain aspects of fair market value are widely misunderstood, particularly the meaning of “highest price” and “public” and the issue of the appropriate or relevant market. Highest price means the highest price that is consistently achieved. It does not mean an extraordinary price that, when viewed in the context of the market for that asset, is an anomaly. Atypically high and low prices are irrelevant to the issue of fair market value. Statistically averaged prices may be distorted if the appraiser includes abnormally high or low prices and the resulting value conclusion will be inaccurate. The frequency of a price being achieved and the aggregate number of sales are most significant to fair market value. Highest price does not mean the single highest price that has ever been achieved or could conceivably be achieved. Fair market value reflects the highest price at which an item might reasonably be expected to change hands in the normal course of business, in the usual market for that item, and it is evidenced by a consistent pattern of sales.

Public = Customary Purchaser
Within the context of the definition of fair market value, the “public” refers to the customary purchaser for the item in its existing form when not purchased for resale. It does not mean all purchasers. A customary purchaser is often an individual buying at the retail market level but, in some circumstance because of the nature of the item [e.g. uncut gemstones], the customary purchaser may also be a wholesaler buying for resale. The customary purchaser may be an individual, a business, a museum or an archival institution. For example, the customary purchaser of an antique artefact may be a private collector, but the customary purchaser of a large quantity of archival material may be a public institution and not an individual.

Selling Price and the Ultimate Consumer
Fair market value represents the amount of money that a property would bring in an open and unrestricted market, in other words, the price, before taxes, that the buyer would pay and at which the property would be sold, and not the amount of money that would be retained by the seller. The ultimate purchaser is akin to the end-user of the property. If a dealer or consultant purchases an object for a client, the ultimate purchaser is the client: the relevant purchase to take into consideration for the estimation of fair market value is the price paid by the end-user, the person who will be “enjoying” the property. If the end-user purchases an object at a discounted price, the relevant value for fair market value purposes is the discounted price paid, not the asking price. The discounted price paid by a consultant/dealer, however, is not relevant to fair market value if the purchase is made for inventory with the express purpose of reselling it to an end-user. In the auction arena, the buyer’s premium that is customarily added to the hammer price is a component of the sales price. The hammer price + premium is relevant to fair market value if paid by an end-user, the ultimate purchaser, but not as relevant if purchased by a dealer for the purposes of resale.

Which Market?
Personal property is traded at various market levels, and determining the most active market, where sales are made to the end user or ultimate consumer, is fundamental to a determination of fair market value. The appraiser must research and consider all active markets. The appropriate market is the market in which such items are customarily sold to the public and is determined by the frequency and total number of sales. For example, if an artist’s work is most frequently sold through commercial galleries and only occasionally at public auctions, the relevant market is the gallery market and not the auction market. Similarly, if the artist’s work is offered for sale through a gallery but the artist sells most of his work directly from his studio, the relevant market is the artist’s studio and not the gallery. In the same way, if the most active market for an artist’s work is the tax shelter market, and relatively few objects are sold at the gallery level, the relevant market for that artist’s work is the tax shelter market, but only in cases where such a market is available to the public in an open and unrestricted manner. The sales that occur in the most active market available to the public are indicative of fair market value.”
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For further information see: http://www.pch.gc.ca/pgm/bcm-mcp/pol/abc-ccp-2010-eng.cfm

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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

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